Matt Badiali is a geologist by training who has parlayed his deep knowledge of natural-resource extraction into a highly successful career as both an investor in his own right and a sought-after investment advisor.
Matt Badiali was influenced early on by the techniques of value investors like Warren Buffet and Benjamin Graham. One of the key tenets that he picked up from these expert investors is the importance of inspecting prospective investments in person.
Matt Badiali’s early career took him to many locations across the globe. Working as a contractor for various large petroleum-services firms, he gained deep expertise in the nuts-and-bolts realities of resource extraction. For example, Badiali doesn’t just analyze ground content and geologic maps when on a job site. He takes into account things like how fast drill crews are able to work and the number of mistakes and general level of professionalism that he sees among site staff. This deeper level of knowledge has given Badiali key insights that other investors are prone to overlook. And it has ultimately meant that Badiali and those following his analyses have consistently outperformed in the energy sector.
Where there’s oil, there’s gas
Despite having total proven oil reserves that are just 1/10th those of Venezuela’s, the United States has recently become the number-one oil-producing country in the world. This has been driven by the deluge of oil spewing from the wellheads of America’s various shale formations, which only became economically feasible to exploit starting in the mid-2000s.
But Matt Badiali says that crude oil is only one piece of the U.S. energy puzzle. He says that investors not overly familiar with the energy sector often tend to overlook the less-sexy but potentially far more lucrative natural-gas sector. In fact, Badiali says that it is natural gas, not crude oil, that could prove to be the real game changer over the next decade in the U.S. energy sector.
Nearly every oil-bearing formation has what is referred to as associated natural gas. This is gas that is actually part of the crude oil liquids and that is released upon extraction from wells. But unlike oil, natural gas can be extracted from other sources, including standalone natural-gas fields, coal seams and shale formations.
Badiali sees a big coming decade for U.S. natural gas
Badiali says that we are on the cusp of what may prove to be the natural-gas century. Natural gas was long considered to be little more than an incidental byproduct of oil drilling. The gas could be used to power generators, heat homes and fuel industrial processes. But the end users often had to be located in close physical proximity to the well.
With the advent of technologies like liquified natural gas, gas-to-liquid processes and green-energy technologies, natural gas is now becoming a globally dominant energy source that has some major advantages over petroleum. The U.S. Energy Information Association has estimated that global natural gas demand will increase by 43 percent by the middle of this century. And with the explosive growth of U.S. natural gas production, this could mean that a number of publicly traded gas producers are poised to reap an unprecedented windfall.
Badiali says that companies like Cabot Oil and Gas Corporation, Exxon Mobile and SilverBow Resources are positioned to rake in huge profits with the rising demand for American natural gas. He also says that there may be diamonds in the ruff among companies operating in the midstream sector, especially those involved in the transportation, liquefaction and exportation of natural gas.
As the global demand for liquefied natural gas continues to rapidly accelerate, driven by many developing countries that are seeking a source of clean, cheap and reliable power generation, U.S. midstream operators could see their best decade ever in the coming 10 years.
A global trend towards cleaner energy
Badiali points out that the promising outlook for natural gas isn’t just being driven by the demand for direct natural-gas applications. One of the key developments over the last decade has been the global push for cleaner, renewable and green energy sources, a trend which is continuing to increase at a rapid pace.
Liquified and gaseous forms of natural gas are both far cleaner than even the cleanest petroleum-derived products, emitting around 50 percent of the total per-energy-unit carbon footprint of gasoline. However, natural gas is also one of the main standby power sources for renewable energy. And Badiali says that this could prove to ultimately be an even greater source of demand than natural-gas-only applications, such as generators and bus engines.
Badiali explains that green-energy sources like wind and solar can produce significant power output, enough to power entire cities on a limited basis. But he also points out that these power sources’ output is inherently unstable. For example, a single cloudy day can all but cut off power generation for a solar generating station. Obvious similar problems exist with wind farms and smaller wind applications; wind is, by its nature, highly variable. A windy day can produce a surplus of energy. But days without wind can cause a near total loss of power-generating capability.
Badiali says that these issues are typically not a problem at the single-residence level for those who can afford and properly implement a good battery system. Even there, though, the number of batteries required to maintain a constant power-use profile is large. And when added to maintenance expenses, Badiali says that homeowners who wish to operate completely off the grid through solar or wind power will often be faced with potentially more-expensive power consumption than if they simply went with their local power company.
However, it is at the level of city or regional power generation that the real problems begin to manifest. Badiali says that, for various technical reasons, the battery solutions that allow single homes to maintain more or less consistent power output with green-energy sources are simply not scalable to the city or regional level. This means that standby power systems, generating methods that fill any energy-production shortfalls when the green sources cannot meet demand, become a crucial element in any large-scale green-energy installation.
Badiali points out that, increasingly, green-energy plants are moving towards exclusive use of natural-gas-fed solutions to bridge their production shortfalls. At the same time, green-energy installations are becoming vastly more popular across the globe, with both China and India aggressively moving away from their highly pollutive coal-fired power plants. And this, says Badiali, has been made possible in large part due to the low cost and high specific-energy yield of natural gas. Badiali sees this trend not only continuing throughout 2019 but accelerating.
The bottom line, says Badiali, is that these future demand considerations are not currently priced in to natural-gas-sector companies. While U.S. production has been continuously increasing over the last decade, the country is rapidly approaching its maximum production capacity. And the barriers of entry to new players into the space are virtually insurmountable, effectively creating a oligopoly for the currently existing natural-gas firms.
Badiali says that the rapid pace of increasing global demand is going to begin putting serious upward pressure on natural gas prices. And upstream companies like Conoco Phillips and Exxon Mobile as well as many midstream firms, will be positioned to reap huge capital gains as the world’s insatiable demand for natural gas turns to U.S. shores as a primary source.
